Opinion
46701/07.
Decided September 3, 2008.
Upon the foregoing papers, plaintiff Washington Mutual Bank (WaMu) moves for an order granting plaintiff summary judgment, dismissing the counterclaim, appointing a referee to compute and amending the caption to substitute Lara Pugh, Gavin Pugh, Jennifer Gillespie and Jill Rappaport for "John Doe No. 1" through "John Doe #4" and deleting the remaining "John Doe" defendants. Defendant Battista Marrelli cross-moves for an order, pursuant to CPLR 3025, granting leave to amend his answer to include, inter alia, additional defenses under the Truth in Lending Act ( 15 USC § 1601 et seq.)(TILA) and its implementing regulations, Federal Reserve Board Regulation Z ( 12 CFR Part 226) (Regulation Z).
WaMu commenced this action to foreclose a consolidated mortgage encumbering the subject property at 227 14th Street in Brooklyn. On August 16, 2006, defendant executed a mortgage in favor of Greenpoint Mortgage Funding Inc. (Greenpoint) to secure a loan in the amount of $632,000.00. On November 21, 2006, defendant executed another mortgage in favor of WaMu in the amount of $108,000.00. The Greenpoint mortgage was assigned by Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Greenpoint, to WaMu and was consolidated with the WaMu mortgage by consolidation, extension and modification agreement dated February 7, 2007 to form a single lien in the amount of $740,000.00. Under the consolidated adjustable rate note, beginning on January 1, 2007, defendant was to pay interest at a rate based upon adding 3.875% to the "Current Index," which is the twelve month average of the annual yields on actively traded United States Treasury Securities adjusted to a constant maturity of one year as published by the Federal Reserve Board, calculated by taking the monthly yields for the most recently available twelve months and dividing by twelve. According to the affidavit of WaMu "section manager" Tracey Brown, who avers to have reviewed the records and books of WaMu, defendant defaulted under the terms of the note and mortgage by failing to make the payment due on August 1, 2007, as indicated in "Schedule E" of the complaint.
In his original verified answer, defendant asserts affirmative defenses of improper service and unclean hands in that plaintiff acted in bad faith by billing and charging defendant at rates higher than stated in the promissory note. Defendant further asserts a counterclaim to recover the alleged overpayments of interest. In his proposed amended answer, defendant adds a combined affirmative defense and counterclaim grounded in TILA, Regulation Z, General Business Law § 349, Real Estate Settlement and Procedures Act (RESPA) ( 12 USC § 2607[b]) and 24 CFR § 3500.14, alleging that plaintiff failed to deliver all material disclosures with respect to the amount financed, finance charge, annual percentage rate (APR) and total number of payments, and further failed to disclose that he had a choice as to how the mortgage broker was to be paid. In particular, defendant contends that the "amount financed" which was disclosed in the TILA disclosure was less than the amount required by law to be disclosed pursuant to the statute and Regulation Z. Defendant further submits that plaintiff violated federal and state law in that defendant was not made aware that the broker was to be paid a "yield spread premium" for procuring a loan at a higher rate of interest than the minimum rate for which defendant would otherwise qualify, and that he could have signed on for a lower rate if the broker were paid out of pocket.
Leave to amend a complaint is to be freely granted, provided that the proposed amendment does not prejudice or surprise the defendant, is not patently devoid of merit, and is not palpably insufficient ( see CPLR 3025[b]; Pellegrini v Richmond County Ambulance Serv., Inc. , 48 AD3d 436 ; AYW Networks v Teleport Communications Group, 309 AD2d 724, 725). "No evidentiary showing of merit is required under CPLR 3025(b). The court need only determine whether the proposed amendment is palpably insufficient' to state a cause of action or defense, or is patently devoid of merit. . . If the opposing party wishes to test the merits of the proposed added cause of action or defense, that party may later move for summary judgment upon a proper showing" ( Lucido v Mancuso , 49 AD3d 220 , 229). The determination whether to grant leave to amend a pleading is within the sound discretion of the court, to be determined on a case-by-case basis ( Guiliano v Carlisle, 296 AD2d 438, 438-439). "A proper exercise of discretion results from principled and supported determinations as to what is just and equitable under the law and all of the relevant facts and circumstances of a case" ( Hafkin v North Shore University Hosp., 279 AD2d 86, 90).
TILA was enacted to promote the informed use of credit by consumers by requiring meaningful disclosure of credit terms ( see Jones v TransOhio Sav. Assn., 747 F 2d 1037, 1040 ([1984]). TILA is a remedial statute and, therefore, should be given a broad, liberal construction in favor of the consumer ( id. at 1040; Flesher v Household Finance Corp., 640 F 2d 861, 863; see N.C. Freed Co. v Board of Governors of the Fed. Reserve Sys., 473 F 2d 1210, 1214["(t)he Act is remedial in nature, designed to remedy what Congressional hearings revealed to be unscrupulous and predatory creditor practices throughout the nation"]). TILA establishes a three-day right of rescission for borrowers in some real estate credit transactions, such as the mortgage refinancing at issue in this action ( 15 USC § 1635[a]). However, where a lender fails to comply with TILA's disclosure or notice requirements, the borrower's right of rescission is expanded to three years from the date of closing ( 15 USC § 1635[f]; 12 CFR § 226.23(3); see In re Porter, 961 F 2d 1066, 1073).
12 CFR § 226.18 sets forth the information which must be provided by the TILA disclosures, including the following: (a) Creditor. The identity of the creditor making the disclosures. (b) Amount financed. The amount financed, using that term, and a brief description such as the amount of credit provided to you or on your behalf. The amount financed is calculated by:
(1) Determining the principal loan amount or the cash price (subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and are not part of the finance charge; and
(3) Subtracting any prepaid finance charge.
(c) Itemization of amount financed.
(1) A separate written itemization of the amount financed, including:
Good faith estimates of settlement costs provided for transactions subject to the Real Estate Settlement Procedures Act ( 12 U.S.C. 2601 et seq.) may be substituted for the disclosures required by paragraph (c) of this section.
(i) The amount of any proceeds distributed directly to the consumer.
(ii) The amount credited to the consumer's account with the creditor.
(iii) Any amounts paid to other persons by the creditor on the consumer'sbehalf. The creditor shall identify those persons.
The following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies.
(iv) The prepaid finance charge.
(2) The creditor need not comply with paragraph (c)(1) of this section if the creditor provides a statement that the consumer has the right to receive a written itemization of the amount financed, together with a space for the consumer to indicate whether it is desired, and the consumer does not request it.
(d) Finance charge. The finance charge, using that term, and a brief description such as "the dollar amount the credit will cost you."
(1) Mortgage loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) shall be treated as accurate if the amount disclosed as the finance charge:
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(2) Other credit. In any other transaction, the amount disclosed as the finance charge shall be treated as accurate if, in a transaction involving an amount financed of $1,000 or less, it is not more than $5 above or below the amount required to be disclosed; or, in a transaction involving an amount financed of more than $1,000, it is not more than $10 above or below the amount required to be disclosed. (e) Annual percentage rate. The annual percentage rate, using that term, and a brief description such as "the cost of your credit as a yearly rate."
For any transaction involving a finance charge of $5 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the annual percentage rate.
(f) Variable rate.
(1) If the annual percentage rate may increase after consummation in a transaction not secured by the consumer's principal dwelling or in a transaction secured by the consumer's principal dwelling with a term of one year or less, the following disclosures:
Information provided in accordance with §§ 226.18(f)(2) and 226.19(b) may be substituted for the disclosures required by paragraph (f)(1) of this section.
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(iv) An example of the payment terms that would result from an increase.
(2) If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures:
(i) The fact that the transaction contains a variable-rate feature.
(ii) A statement that variable-rate disclosures have been provided earlier.
(g) Payment schedule. The number, amounts, and timing of payments scheduled to repay the obligation.
(1) In a demand obligation with no alternate maturity date, the creditor may comply with this paragraph by disclosing the due dates or payment periods of any scheduled interest payments for the first year.
(2) In a transaction in which a series of payments varies because a finance charge is applied to the unpaid principal balance, the creditor may comply with this paragraph by disclosing the following information:
(i) The dollar amounts of the largest and smallest payments in the series.
(ii) A reference to the variations in the other payments in the series.
(h) Total of payments. The total of payments, using that term, and a descriptive explanation such as "the amount you will have paid when you have made all scheduled payments."
In any transaction involving a single payment, the creditor need not disclose the total of payments.
While the HUD-1 statement indicates that the total amount paid to defendant (exclusive of the settlement charges and payoff amounts to the senior Greenpoint mortgage) was $740,000.00, the "amount financed" listed in TILA disclosure is $736,810.32, a difference of $3189.68. For loans that are secured by an interest in real property, certain expenses may be deducted from the amount financed and not considered finance charges, including fees for title examination, insurance, deed preparation, settlement, notary service, obtaining a credit report, appraisal, and application ( 15 USC § 1605[e]; 12 CFR § 226.4). However, it is not readily apparent as to what exact charges make up the amount which was subtracted from the $740,000.00 principal to make up the "amount financed" which was disclosed in the TILA statement. An inaccuracy in the "amount financed" may lead to inaccuracies in the APR and finance charge figures in violation of TILA ( see England v MG Investments, Inc., 93 F Supp 2d 718).
A mortgage foreclosure action is equitable in nature ( see Notey v Darien Constr. Corp., 41 NY2d 1055). In light of the problematic increase in the number of foreclosure actions commenced in this county and elsewhere in recent years, which increase is partially the result of unscrupulous practices of some lenders and mortgage brokers, this court must be particularly careful in each foreclosure action to assure that all potential defenses of the mortgagor be considered before this court issues a judgment which will lead to the extinguishing of the mortgagor's rights and interests in his or her property. In this matter, the court finds palpable merit in defendant's proposed amended answer, and that further examination of whether plaintiff has fully complied with TILA, Regulation Z and other federal and state law is warranted before judgment may be granted in its favor. Given the fact that this action is in its early stages, the court does not find significant prejudice to plaintiff will result if defendant's cross motion to amend is granted.
As a result, defendant's cross motion for leave to serve and file an amended verified answer is granted, and those parts of plaintiff's motion for summary judgment and for the appointment of a referee are denied without prejudice to renew pending completion of discovery on the TILA issues and other issues raised in the amended answer. That part of plaintiff's motion to amend the caption is granted.
The foregoing constitutes the decision and order of the court.